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Belly-churning stock swings draw red line below BIG in Big Tech

(Bloomberg) — Millions of ordinary investors pursue Facebook, whether they fully realized it or not. Now they will be ready for a better ride.

The belly-churning collapse of Facebook parent Meta Platforms Inc on Thursday — a record $252 billion stunner — puts a bright red line under “Big” in Big Tech.

Since March 23, 2020, the depth of the pandemic-induced market downturn, five tech stocks – Microsoft Corp, Alphabet Inc, Apple Inc, Inc and Meta – have collectively accounted for 27% of the S&P 500. edge. Going back five years, this percentage is 36 percent.

That was then. On Thursday, Meta’s unprecedented 26% drop alone wiped out nearly 200 points from the Nasdaq 100, or nearly a third of the benchmark index’s 4.2% loss.

To be sure, not all tech names are beatable. Amazon shares rose about 18% on Thursday after reporting profits, analysts estimate.

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“To the extent that retail investors own it outright or through passive indices, the pain for their portfolios is being felt significantly more than those institutional investors, or those investors who have an appropriately underweight – or don’t own — their portfolio in that company,” said Chris Zacarelli, chief investment officer of the Independent Advisors Alliance.

Meta shocked everyone with the news late Wednesday that Facebook lost customers for the first time in its history. Until now, many investors, especially smallholders, viewed Meta as one of the bluest of blue chips – a company with unlimited potential.

Toby Alli was one of the merchants in Maryland who was seeing a scary decline. He first bought Facebook in late 2019 and has been adding to his post ever since.

“I consider Facebook a safe stock in which it will not be,” the 34-year-old said. “You expect these drop offs with meme stock, but you don’t really expect a 25% pullback from Facebook.”

Now, after seeing over $1,000 wiped out from his portfolio, he’s asking himself some tough questions about his belief in Meta.

fang exposure

Others were just along along for the ride because the funds they invest in — both the actively managed and passive variety — have become so concentrated in Big Tech.

“So much market cap is tied to big technical names because the S&P and most other indexes are market-cap weighted,” said Max Gokhman, chief investment officer at AlphaTrAI. “People who hold their 401(k)s and invest in defaulted options have tremendous exposure to tech and fang stocks in particular.”

Many of the most popular funds in 401(k) retirement savings plans are big slugs of mega-cap technology, and have become increasingly concentrated in a handful of stocks. For example, Fidelity Contrafund — one of the top 10 most popular funds in retirement savings plans — accounted for 45.9% of its top 10 holdings as of December 2020. This percentage increased to 48.5% by November of 2021 and 49.1% by the end of 2021. of 2021.

As of November 31, Contrafund was the largest holding on Meta at 9.3%. When Amazon, Microsoft, Apple and Alphabet were added, the five stocks made up more than a third of the fund, at 33.6%.

At that time Facebook had already taken a bite out of returns. At the end of 2021, Contrafund’s quarterly commentary to investors noted that “by far, the fund’s biggest individual opponent was Meta Platform (formerly Facebook), which returned -1% over the past three months.” The fund was still a fan of the stock back then, noting that as of December 31, it was the fund’s biggest overweight “because we like the company’s very healthy operating margin and ability to generate free cash flow.”

retirement favorite

Another retirement plan favorite, the T. Rowe Price Blue Chip Growth Fund has bet bigger and bigger on mega-cap technology. Its top 10 holdings made up 57.5% of the fund as of December 31, up from January’s 49.2%. 31, 2020. By the end of 2021, five mega-caps made up more than 45% of the fund, up from their 34.7% weighting in January. 31, 2020 – Microsoft (11.1%), Alphabet (10.2%), Amazon (9.8%), Apple (7.8%) and Meta (6.6%).

Carl Marcel, a 28-year-old business owner in Seattle, is facing pain in both the meta stock and his index-tracking fund. He has about 70% of his portfolio in stocks, 24% in ETFs tracking indexes such as the S&P and Nasdaq, and the rest in crypto. He is estimated to have lost between $20,000 and $30,000 as a result of the Meta Drop.

Marcel said, ‘I didn’t expect it at all. “Everything looked positive in the last earnings report. Usually they never let us down so the market is rethinking how to approach it.”

But he said he is still optimistic about the company over the long term and plans to buy more shares while trying to diversify.

To mitigate risk, AlphaTrAI’s Gokhman suggests that investors look beyond tech-focused indexes when allocating their money. Diversifying away from a technical concentration can help – in a more international stock or value sector – which are affordable relative to earnings.

“The worst thing an investor can do is react to sentiment driven by a big move because the move has already happened,” he said. “The meta isn’t going away anytime soon. But then really take a look at your asset allocation.”

To contact the authors of this story:
Claire Ballantine in New York [email protected]
Susan Woolley in New York [email protected]

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